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With the market economy advancing, the notify-commit mechanism for market entity registration came into being. This article delves into a recent case of fraudulent business change registration to closely examine the mechanism, pinpointing its inherent flaws and risks, and identifying fundamental corrective solutions.

Case overview

Beijing-based company A specialises in internet data services under the umbrella of a state-owned company.

Using the company¡¯s good reputation for criminal purposes, the suspect, Zhao, forged resolutions of the shareholders¡¯ meeting and board of directors ¨C while reporting the loss of the corporate seal and business licence ¨C to successfully, fraudulently change registration information for company A with the Market Regulation Bureau of Haidian district.

This enabled him to change the registered information on legal representative, registered address, board members, supervisors and managers of company A, replacing these personnel with members of his own criminal group.

The authors retrieved company A¡¯s registration file and checked it with the staff, only to find that all the resolutions of the shareholders¡¯ meeting and board of directors required for the change of registration were affixed with forged seals of shareholders, and unauthorised or false signatures of directors.

In response, the authors assisted company A in filing a criminal case against the forgery of its seal, prompting the Criminal Investigation Detachment of the Xicheng branch of the Beijing Municipal Public Security Bureau to launch an investigation of the case.

An application was also submitted for cancelling the fraudulent change of registration with the Market Regulation Bureau of Haidian district.

The authors subsequently learnt from the Haidian bureau that materials submitted for a change of registration of company A were not stamped with company A¡¯s seal and included no original or duplicate of its business licence.

On seeking an explanation, the Haidian bureau replied that to simplify the registration process for market entities, a company is allowed to apply for a change of registration when reporting the loss of its corporate seal and business licence.

In this case, Zhao and his accomplices took advantage of the policy loophole, managing to complete a change of registration for company A simply with forged seals of shareholders and signatures of directors, without any connection with, or authorisation from, company A.

As a result of Zhao¡¯s fraudulent change, company A¡¯s official seal and business licence were invalidated, while the legal representative and board members were all replaced with unrelated individuals. The suspect, Zhao, was meanwhile able to exploit the new registration information and forged company seals to issue numerous board resolutions and company documents for illegal activities.

Communication with the Haidian District Market Supervision Administration revealed that revoking this registration change could take several months to a year.

Not only did company A suffer significant financial losses in this case; it remains uncertain whether Zhao and his team had taken advantage of the fraudulent registration to engage in more severe crimes such as illegal public fundraising and fraud.

It also exposes substantial risks in the notify-commit mechanism for market entity registration.

Policy loopholes and risks

This case exposes the loopholes and risks in the notify-commit mechanism for market entity registration in practice. It is now high time to re-examine the mechanism and assess the necessity of an overhaul.

Firstly, the mechanism¡¯s biggest problem is its inability to forestall and control credit risks. The registration of market entities relies on their credible commitment, rather than supervision by the registration authority. Given the current imperfections in China¡¯s social credit system, it is likely that some lawbreakers use the policy loopholes for fraudulent change of registration.

Secondly, the registration authority adopts formalities examination, making it hard to promptly detect false submittals and fraudulent acts. In the absence of substantive examination, criminals can easily use policy loopholes to provide false material for illegal purposes. The integrity of market players is seriously undermined by such regulatory loopholes being readily exploitable by law breakers.

Additionally, when key roles such as legal representatives and directors are illegally changed, the company is likely to suffer from operational difficulties and chaotic management. This undoubtedly contradicts policy requirements aimed at protecting and promoting the development of small and medium-sized private enterprises.

In practice, the process for victim companies to defend their rights against illegal changes is also complex and lengthy, making it difficult to mitigate losses immediately.

This leads to a distorted situation where a mature business can be easily ruined by criminals at very little cost.

Risk response

Once illegal changes to its business registration information have been detected, the victim company should take countermeasures without delay.

It should promptly contact the business registration department to explain the situation in detail and request cancellation of the fraudulent registration. Additionally, the company may file an administrative lawsuit in court to seek a judgment nullifying the registration department¡¯s approval of the changes.

Furthermore, if there are illegal activities such as the forgery of company seals, the company should report the case to the police to pursue criminal charges and protect its legal rights.

Key takeaway

The notify-commit mechanism for market entity registration has invigorated the market economy. However, its inherent flaws also pose significant risks to businesses.

To address these challenges, relevant authorities must take these issues seriously and implement fundamental corrections to the mechanism. At the same time, companies must adopt proactive measures to safeguard their development, contributing to a fair, transparent and orderly market economy.

Xu Rui is a partner and Wang Wenchao is an associate at Starrise Law Firm.